How did the AT1 bond ranking clauses influence the CDDC decision?

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The EMEA CDDC Determined Credit Suisse AT1 Bonds Were Subordinate, Preventing Payouts on Credit Default Swaps

Holders of credit default swaps (CDS) linked to Credit Suisse bonds will not receive a payout following the EMEA Credit Derivatives Determination Committee's (CDDC) ruling that the bank's state-engineered merger with UBS did not constitute a credit event. This decision hinges on the committee's interpretation of the ranking clauses within the Additional Tier 1 (AT1) bonds, which found them to be subordinate to other debt instruments. The CDDC's unanimous decision, made by a panel of eleven finance companies, means that the US$17 billion in AT1 bonds were effectively written off without triggering the insurance contracts.
AT1 Bonds Deemed Subordinate to 2020 Bonds

The core of the CDDC's decision rested on the examination of the ranking clauses for Credit Suisse's AT1 bonds. An investor had argued that these AT1 bonds were pari passu, meaning they ranked at the same level, as a subordinated bond that matured in 2020, which was a reference bond for the CDS contracts. However, the CDDC concluded that holders of the 2020 bonds were priority creditors compared to the AT1 bondholders, establishing a clear hierarchy of debt.
No Governmental Intervention Credit Event Occurred

Based on its analysis of the bond rankings, the CDDC stated that a "Governmental Intervention Credit Event" had not occurred. This is the specific condition that would have necessitated a payout from the credit default swaps. The committee's finding directly addresses the investor's request, which sought adjudication on whether the merger constituted such an event.
Market Implications for AT1 Bonds

The CDDC's ruling is significant for the broader AT1 market, as it reinforces the subordinate nature of these instruments in distressed scenarios. If the AT1 bonds had been deemed pari passu with other subordinated debt, it would have created considerable uncertainty and potential systemic risk for the AT1 market, which is designed to absorb losses before equity. The amount of gross notional outstanding CDS linked to Credit Suisse bonds stood at over US$19 billion in March, highlighting the substantial financial implications of this determination.

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How did the AT1 bond ranking clauses influence the CDDC decision?

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